There are many factors that contribute to a successful business.

Planning, Strategy, Leadership and Execution all come to mind.

These are the cornerstones of a productive organization and most great companies that I have come across do most of these things well.

And when I speak with many business leaders, these are the items that they immediately address when I ask them about their business goals.

Underneath all of these “High Level,” items, there lies the numbers.

The numbers are what we as accountants use to measure a businesses success. And while the numbers don’t always tell the whole story, they often tell a pretty significant part of it.

The Numbers Don’t Lie

When you have been in private practice working for small and medium businesses as long as I have, you see so many different types of businesses.

Both successful and struggling organizations, all with their unique set of challenges, I feel like I have seen just about everything.

But the one thing that I consistently tell my clients is they cannot ignore the numbers.

The numbers provide an outlook to the businesses health and wellness along with comparative data so business leaders can see how their execution compares to their strategic plan.

Many of these same business leaders are extremely focused on the businesses profitability. And while profit is without question a key indicator of a businesses success, thanks to GAAP accounting, there is a lot of nuance to profit especially as it relates to cash flow.

Profit is a Number, But Cash Flow Runs your Business

Would you believe it if I told you that your business can be making money and not have any cash?

Depending on your balance sheet and access to credit, a business can actually be driving strong profit but be hampered by cash flow.

For most financial managers this may immediately make sense. But many business owners don’t understand this.

A simple explanation is this.

With revenue recognition allowing you to realize a sale when it is invoiced (GAAP), you can actually have a large amount of revenue show up on your income statement. With healthy margin and well managed operating expenses this can yield a healthy bottom line profit.

However, if you haven’t been paid your balance sheet is sitting with a receivable.

While a receivable can be used as leverage to borrow, until you either do that or collect the money you are showing a profit without cash flow.

An array of factors including number of transactions, gross profit, days outstanding and cost of money can all impact your businesses cash flow, but one thing is for certain profit alone doesn’t equate to cash flow and a business without cash is going to struggle no matter how profitable.

Cash Flow is King

Cash flow and cash flow planning are every bit as important if not more important than profit planning.

As mentioned above, a good business plan along with well managed expenses should yield profit for your business.

But execution really relies on a business with adequate resources for continuing your operations.

Having sufficient cash flow allows for meeting your obligations on time which puts you in a stronger position with your suppliers and of course with your employees.

In addition to just meeting the basic expense requirements of your business, sufficient cash flow is the key to a business being opportunistic.

Whether an opportunity to take on a new customer, employee or even an acquisition, companies with healthy cash flow and balance sheets are more likely to be able to take advantage when these opportunities come up.

As a CPA, we get to see the inner workings of so many companies, and believe me when I tell you, companies with strong cash flow are better able to strategically plan, lead and execute. This isn’t coincidence, it is because Cash Flow may just be the single most important number for your business.

What does your businesses Cash Flow look like?
 
 
Disclaimer: The information contained in this Blog (the “Blog”) is intended solely to provide general guidance on matters of interest for the personal use of the reader, who accepts full responsibility for its use. In no event will BRP, or its partners, employees or agents, be liable to you or anyone else for any decision made or action taken in reliance on the information in this Blog or for any consequential, special or similar damages, even if advised of the possibility of such damages.

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